Are you still asking "Can I expense this...?" Use our free tool!
Most electrical contractors are overpaying on taxes. Not because they did something wrong, and not because the tax man is out to get them. Just because nobody sat down and showed them a better way to set things up.
There’s a business structure called an S-Corp that changes how your income gets taxed. For contractors with enough profit above a reasonable salary, it can save thousands of dollars a year. Sometimes more.
The way it works is you pay yourself a salary from the business, and the rest of the money comes out a different way. The IRS taxes those two buckets differently, and that difference is where the savings live. But there are rules around how you set it up, and getting it wrong costs more than doing nothing at all.
That’s what we’ll break down here.
When you work for someone else, your employer covers half of your Social Security and Medicare taxes. You pay 7.65% and they match it. When you work for yourself, both halves are yours. That’s the 15.3% self-employment tax, which generally applies to 92.35% of your net self-employment earnings before income tax even comes into the picture. It’s the biggest reason self-employed people feel like they’re getting crushed at tax time even when business is good.
An S-Corp changes that. Instead of all your profit flowing straight to your personal tax return, you become an employee of your own company. You pay yourself a reasonable salary, and that salary gets taxed like a normal paycheck. But the money left over after your salary comes out as a distribution. You still pay income tax on your share of the S-Corp’s taxable profit, whether or not that cash is distributed, but that pass-through business income generally isn’t subject to Social Security and Medicare taxes. That’s where the savings come from.
Take a contractor netting $150,000 for the year. As a sole proprietor, self-employment tax runs about $21,194. That’s just the Social Security and Medicare piece, before income tax even starts.
Now run it as an S-Corp with a $70,000 salary. Payroll taxes on that salary come out to roughly $10,710. The remaining $80,000 comes out as a distribution and skips FICA entirely. Total savings: about $10,484 a year just by changing the structure.
Enough for a new service van, a few months of a good apprentice’s wages, or a vacation you’ll only feel slightly guilty about.
You’ve probably heard the 60/40 rule. Pay yourself 60% as salary, take 40% as a distribution, and you’re good. It gets passed around like it came from the IRS. It didn’t. The IRS never published that number, and it won’t protect you if they come looking.
There is no IRS-approved ratio. What the IRS actually cares about is whether your salary is realistic.
If you had to hire someone to do everything you do, from running jobs to managing the crew to pulling permits, what would that person cost? That’s what reasonable compensation means. It’s a market rate question, not a math formula.
For most owner-operated S-Corps, salary ends up somewhere between 35% and 60% of business profit before the owner’s salary is counted. That range shifts based on how much you’re working in the field versus managing, and how much of the revenue depends on you personally versus your crew showing up.
For electricians specifically, published benchmarks put owner compensation in the $60,000 to $95,000 range. Residential service work lands toward the lower end. Commercial and industrial work pushes higher, because the market pays more for that expertise and the IRS knows it.
If you’re pulling $180,000 in profit on commercial installs and paying yourself $30,000 a year, that’s a problem waiting to be found.
Reasonable compensation can be a major issue when the IRS examines an S-Corp. The IRS knows exactly why people elect S-Corp status, and the salary line is something they can look closely at.
There’s a documented case involving CPA David Watson, who paid himself $24,000 in salary while taking more than $175,000 in distributions each year. The IRS challenged the salary, and the court accepted $91,044 as reasonable compensation. That meant an additional $67,044 per year was treated as wages subject to employment taxes. The savings he thought he was getting became a bill he didn’t plan for.
It goes both directions. Pay yourself too little and you risk that reclassification, plus back taxes and penalties. Pay yourself too much and you’re voluntarily paying payroll tax you never owed. There’s a number that makes sense for your business specifically, and it takes some actual analysis to land on it.
If the IRS ever questions your salary, the first thing they want to see is that you didn’t just pick a number out of thin air. You need to be able to show your work. It doesn’t have to be a big formal report. A page of notes that explains your reasoning is enough.
Keep a simple document with your tax records that covers:
If an auditor ever looks at your return, the difference between a quick review and a painful one is usually whether there’s paperwork behind the number. An auditor who sees documented reasoning treats the situation very differently than one who sees a suspiciously round number with nothing behind it.
Most people skip this because it feels like extra work that doesn’t matter. It matters when it matters.
One reason why everyone doesn’t elect S-Corp status is that the S-Corp election isn’t free.
You’ll need payroll processing, a separate business tax return, and bookkeeping that stays current throughout the year instead of just at tax time. We typically say to budget around $3,000 a year in added overhead for a typical setup.
At $80,000 net income with a $40,000 salary, the gross difference in employment taxes is roughly $5,184. Subtract the $3,000 in S-Corp costs and you’re ahead by about $2,184 before considering income tax, QBI, state taxes, and other differences. The higher your income goes above that, the better the savings look. For most contractors earning above $50,000 to $70,000 in net profit, the math works in your favor.
Two things specific to 2026 worth knowing. First, the Social Security wage base is $184,500 this year. That means if you pay yourself a high salary, only the first $184,500 of it carries the full Social Security rate. Anything above that is just Medicare tax, which is much lower.
Second, the 20% Qualified Business Income deduction is still in place under the One Big Beautiful Bill Act. If you qualify for it, that stacks on top of the payroll tax savings from your S-Corp structure.
Filing the S-Corp election is one form. The actual value comes from managing the structure year-round, not trying to piece it together in April when the deadline is already on top of you.
Your salary needs revisiting every time your revenue grows. Your distribution timing affects your cash flow. Your documentation needs to be in order before you file, not after. None of that comes together cleanly when you’re scrambling through it in a single week at the end of tax season.
You shouldn’t have to become an accountant to run an electrical business. You should have someone who already ran the numbers, checked the benchmarks, and wrote the memo before you ever thought to ask.
If your business is generating enough profit above a reasonable salary that you haven’t run this analysis for your specific situation, that’s worth fixing.
Get in touch with us here and we’ll run your numbers before the IRS runs them for you.
Until next time!
Adam Traywick, CPA is the President and founding CPA of Adam Traywick, LLC, a Adam Traywick CPA small-business accounting firm. He has over 20 years of experience helping small business owners across home-services trades, hair salons, real estate, and insurance agencies optimize taxes, run cleaner books, and avoid the surprises that come from once-a-year accountants.
